Essays on the economic impact of financial reporting.
This dissertation consists of three essays which examine the real economic impact of the
financial reporting environment.
In Earnings Volatility and Market Valuation: An Empirical Investigation, I use data on
a large cross-section of US firms from 1973 to 1998 to address the issue of whether
there is a systematic link between the market value (as proxied by Tobin's q) of a
company and the volatility of its quarterly earnings stream. Using a multivariate
regression framework, and controlling for other factors which prior literature has shown
to be related to q, I find a strong, negative relationship between market value and
earnings volatility. The relationship remains after controlling for cash now volatility
indicating that (as asserted by corporate management) "accounting-induced" earnings
volatility has an adverse impact on market value.
In Accounting for Derivatives and Corporate Risk Management, I consider the question
of how non-financial corporations should report the results of their use of financial
derivatives. Using SFAS 133 as a framework, I introduce three possible accounting
regimes and characterize the information provided under each of the three alternatives. I
then present a simple economic model with which to analyze the effect on corporate risk
management policies of the different regimes and find that hedging distortions may
occur depending on the regime imposed by the regulatory authorities. Finally, I discuss
the policy implications of this result.
In The Economic Consequences of Purchase and Pooling Accounting (co-authored with
Henri Servaes),w e investigate the market reaction to various announcements by the
FASB and SEC regarding the potential abolition of pooling accounting, the preferred
method of corporates for accounting for business combinations. Our results indicate a
negative reaction to announcements which increase the probability of such an abolition
and are consistent with the hypothesis that investors are to some extent fixated on